NEST – advice regarding the newest government pension initiative planned for next year.
An outline of the new pension scheme to be introduced in 2011.
As part of a series of announcements on pensions the government has confirmed that all employers will have pay into a pension for their employees.
Unless a comparable scheme is offered by the employer, employees will have to be enrolled in NEST (National Employment Savings Trust) and an employer must contribute.
We thought we would take a look at this issue in more detail and see just how it affects both employees and employers.
What is NEST?
NEST will be a large money purchase scheme, the contributions it receives from employers and employees will be invested to provide a pension for the member at retirement.
Why has the government done this?
The government believe that we are not saving enough for retirement. Initiatives such as Stakeholder pensions have had little impact and the government is clearly concerned that with increased life expectancy we will not have sufficient income in retirement and will therefore rely on the state. The government says that between four and eight million employees will start to save in a pension for the first time.
Will it be compulsory?
If a comparable scheme, in terms of contributions, is not offered, then an employer will have to automatically enroll employees into NEST and also make the necessary contributions. Although enrolment will be automatic employees can opt out of NEST should they wish to do so.
Are there any exceptions?
Yes, employees below the age of 18 will be exempt and if an employee earns below £7,475 they will not be automatically enrolled into NEST. Furthermore an employer does not have to auto enroll a member of staff who has been employed for less than three months.
When will it start?
It is important to divorce certain elements of the proposals – NEST will start next year, however auto enrolment will be phased in between October 2012 and 2016, by which time all firms will be required to have enrolled staff in NEST or provided a suitable alternative. The largest employers will be expected to join first with smaller firms joining later.
How much will have to be paid in?
The aim is to have a total contribution of 8% by 2017; this is split between employees paying 4%, employers 3% and the government, in the form of tax relief, 1%. However contributions will be phased in as follows:
Until October 2016, the minimum overall level of contributions will be 2%, with 1% coming from employers.
From October 2016 to September 2017, total contributions will be 5% with 2% coming from employers.
And from October 2017, the total minimum contribution level will be 8%, with employers contributing at least 3%.
Both employees and employers will be able to increase contributions above these levels should they choose to do so. Unlike most existing work based pensions, the contributions will be calculated if an employee pays above the National Insurance earnings threshold of £5,715, for example if an employee was earning £15,000 per annum, their own contribution would be approximately £23 per month.
The contributions into NEST are also currently capped at £3,600 per annum, although it is possible that this level will be abolished by 2017.
Where will the contributions be invested?
NEST will offer a number of funds for the contributions to be invested into and annual management charges are expected to be low, although this is likely to limit the range and type of funds available. Indeed NEST Chairman Lawrence Churchill has already said, “We have decided that regular contributions are more important than returns. Since our members are risk averse this could lead to Nest taking a more cautious approach to fund choice to stop opt-outs”.
What action should you take now?
If you are an employer, now would be an excellent time to review any pension arrangements you have in place for your employees. If you do not have a scheme in place for your employees you should think about how NEST will be implemented in your work place and how it will affect your long term cashflow.
If you are an employee there is probably no action you need to take now, however reviewing your retirement arrangements is always worthwhile.